07/09/2010

The expiration of the federal tax incentives for housing is causing a major slowing in the Nation’s new and resale housing markets. The observed downturn may be exaggerated by the burst of activity in April to beat the tax incentive expiration deadline, and the inevitable drop in activity. If one averages the last 3 months, the data shows that housing is not falling off the cliff, but that it is also not going anywhere. The Nation’s new homes sales dropped to 300,000 units, the lowest level on record. Meanwhile, pending resales in May, which is a short term leading indicator, declined 30% for the month suggesting sharp drops in escrow sales this summer. In California pending resale declined 17% in May, not as bad as the Nation’s decline. This could change the state’s lean inventory situation. We forecast that California’s unsold inventory index will register 5.5 months of inventory in June and will likely break into the danger zone by July or August. The national and California trends suggest that the federal tax incentives were spectacularly unsuccessful to jumpstart the housing market. With mortgage rates already at historical lows of 4.5%, a strong dose of job growth is sorely needed, instead of another ineffective “give away”.